Rowena Buan-Yost, CPA-MBA

1Chapter 22

Investments in Associates

2Definitions

3Definitions

4Significant influenceDetermining if significant (SI) influence exists requires judgement– SI presumed if investor holds, directly or

indirectly, ≥20% of voting power of associate, unless clearly demonstrate this is not the case

– conversely, if the investor holds <20%... – a majority ownership by another investor

does not preclude an investor from having SI

5Significant influence continued

• Determining if SI exists requires judgement. This means considering all factors, eg– potential voting rights (currently exercisable or

convertible– representation on the board of directors or

equivalent governing body– participation in policy-making processes,

including participation in decisions about dividends or other distributions

– material transactions between the investor and the investee

– providing essential technical information – interchange of managerial personnel

6Loss of Significant influence

• Factors– Loses the power to participate in

the financial and operating policy decisions of the associate

– Can occur with or without change in the absolute or relative ownership interest

– As a result of a contractual agreement

7Equity method

• Based on the economic relationship between the investor and the investee

• Investor and investee are one and the same

• SI exists

• Investment must be in ordinary shares

• Investment in associate shall be classified as noncurrent asset

• Parent – investor has control over the investee (Subsidiary)

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Equity method (Illustration on Page 753)

In the books of investor:

• Initial recognition : At cost

• Subsequent recognition :– Increase / decrease carrying amount with profit /loss of the associate– Recognize profit / loss of subsidiary in P& L account of investor– Reduce the carrying amount with dividends received from associates

• Adjust the carrying amount for the following:– changes in the investee’s other comprehensive income due to :

– Changes arising from the revaluation of property, plant and equipment

– foreign exchange translation differences.

• Adjust investor’s other comprehensive income:– With the investor’s share of those changes arising from revaluation

exchange difference etc.

9Excess of Cost over CA• Investor pays more for an investment than the carrying amount of the asset

– Undervaluation of the investee’s assets (bldg, land, inventory)– Goodwill

• If the assets of the investee are fairly valued – attribute the excess of cost over CA of the net assets to goodwill

• If the excess is attributable to undervaluation of depreciable asset– It is amortized over the remaining life of the depreciable asset

• If the excess is attributable to undervaluation of land– It is not amortized because land is nondepreciable

• If the excess is attributable to inventory– It is expensed when the inventory is already sold

• If the excess is attributable to goodwill– It is included in the CA of the investment and not amortized

• The entire investment is tested for impairment at the end of each period.

10Excess of Net Fair Value over Cost

• Included as income in the determination of the investor’s share of the associate’s profit or loss in the period in which the investment is acquired

Investment in Associate xxx

Investment Income xxx

11Investee with Heavy Losses• Share of losses equals or exceeds the CA of

investment– Investor discontinues recognizing its share of further

losses–The investment is reported at nil or zero value

• Subsequently reports income

- Investor resumes recognizing income if its share of income equals the share of losses not recognized

12Impairment Loss• Impairment loss shall be recognized

– When the CA of investment in associate exceeds its recoverable amount

• Recoverable amount = higher between (FV – cost of disposal) and (value in use)

• FV = proceeds of sale at measurement date

• Value in use = PV of the estimated future cash flows expected to arise from the continuing use of an asset and from its ultimate disposal

• Allocated first to remaining goodwill

13Investee with Preference Share

• Cumulative–Investor’s share of profit or loss is computed

after deducting the preference dividends, declared or not

• Non Cumulative–Investor’s share of profit or loss is computed

after deducting the preference dividends only when declared

14Other Changes in Equity• Changes arising from Revaluation of PPE

and from Foreign translation differences–Changes are recognized directly in equity of the

investor

15Adjustment of Investee’s Operations• The most recent available FS of the associate are used by

the investor in applying the equity method (difference shall be not > 3 mos)

• Adjustments shall be made to conform the associate’s accounting policies to those of the investor

• Investor’s share in the associate’s P/L resulting from upstream/ downstream transactions is eliminated

– Upstream transactions are sales of assets from an associate to the investor– Downstream transactions are sales of assets from the investor to an

associate

16When Equity Method Not Applicable• If the investor is a parent that is exempt from preparing

consolidated FS• The investor is a wholly-owned or partially-owned

subsidiary of another entity and the other owners do not object to the investor not applying the equity method

• The investor’s debt and equity instruments are not traded in a public market or over the counter market

• The investor did not file or in the process of filing FS with SEC for the purpose of issuing any class of instruments in a public market

• The parent of the investor produces consolidated FS available for public use that comply with PFRS

17Discontinuance of equity method

• Stop using equity method when SI ceases, account for the investment as:– Financial asset at FV through profit

or loss– Financial asset at FV through other

comprehensive income– Nonmarketable investment at cost or

investment in unquoted equity instrument

18Measurement after loss of SI

• Any retained investment shall be measured at FV included in P&L

• If disposal, derecognise Associate & recognise in profit or loss the difference between (i) proceeds + fair value of retained interest & (ii) CA when SI lost.

• without disposal regard FV at that date as a new cost

19Associate Held for Sale• Accounted for in accordance with PFRS 5

• Shall be measured at the lower of CA and FV less cost of disposal

20Investment of less than 20%• The investor does not share in the P/L of the investee

• Dividends received by the investor is regarded as dividend income

• Fair Value Method:– Financial assets are measured at FV through P/L– Financial assets are measured at FV through OCI– Used when associate is acquired in stages

• Cost Method:– Applied to investment in unquoted equity instrument or

nonmarketable equity investment

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